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Description of Business and Summary of Significant Accounting Policies (Policies)

3 Months Ended

9 Months Ended

Sep. 30, 2020

Description of Business. RealNetworks provides digital media software and services to consumers, mobile carriers, device manufacturers, system integrators, and other businesses. Consumers use our digital media products and services to store, organize, play, manage and enjoy their digital media content, either directly from us or through our distribution partners. See Note 5 Acquisitions and Dispositions for information on the Napster music business, which offers a comprehensive set of digital music products and services designed to provide consumers with broad access to digital music. As of the third quarter of 2020, Napster is being treated as a discontinued operation for accounting and disclosure purposes. Napster’s operating results and financial condition have been recast to conform to this presentation.

Inherent in our business are various risks and uncertainties, including a limited history of certain of our product and service offerings. RealNetworks' success will depend on the acceptance of our technology, products and services and the ability to generate related revenue and cash flow.

In this Quarterly Report on Form 10-Q (10-Q or Report), RealNetworks, Inc., together with its subsidiaries, is referred to as "RealNetworks," the "Company," "we," "us," or "our." "RealPlayer," "RMHD," "RealMedia," "GameHouse," "Kontxt," "SAFR" and other trademarks of ours appearing in this report are our property.

Use of Estimates

Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Segments


Note 12			Segment Information

We manage our business and report revenue and operating income (loss) in three segments: (1) Consumer Media, which includes licensing of our codec technology and our PC-based RealPlayer products, including RealPlayer Plus and related products; (2) Mobile Services, which includes our SaaS services and our integrated RealTimes® platform which is sold to mobile carriers; and (3) Games, which includes all our games-related businesses, including sales of in-game virtual goods, mobile games, games licenses, games subscription services, and in-game advertising and advertising on game sites.

RealNetworks allocates to its Consumer Media, Mobile Services and Games reportable segments certain corporate expenses which are directly attributable to supporting these businesses, including but not limited to a portion of finance, legal, human resources and headquarters facilities. Remaining expenses, which are not directly attributable to supporting these businesses, are reported as corporate items. These corporate items may also include changes in the fair value of the contingent consideration liability, restructuring charges, and stock compensation charges.

RealNetworks reports three reportable segments based on factors such as how we manage our operations and how the Chief Operating Decision Maker (CODM) reviews results. The CODM reviews financial information presented on both a consolidated basis and on a business segment basis. The accounting policies used to derive segment results are the same as those described in Note 1, Description of Business and Summary of Significant Accounting Policies, in the 10-K.

Segment results for the quarters and nine months ended September 30, 2020 and 2019 (in thousands):


Consumer Media	Quarter Ended September 30,				Nine Months Ended September 30,

	2020		2019		2020		2019
Revenue	$	2,543	$	3,632	$	9,197	$	8,738
Cost of revenue	593		705		1,723		2,341
Gross profit	1,950		2,927		7,474		6,397
Operating expenses	2,092		2,692		6,754		8,688
Operating income (loss)	$	(142)	$	235	$	720	$	(2,291)


Mobile Services	Quarter Ended September 30,				Nine Months Ended September 30,

	2020		2019		2020		2019
Revenue	$	6,400	$	6,895	$	19,551	$	20,831
Cost of revenue	1,511		1,721		4,989		5,634
Gross profit	4,889		5,174		14,562		15,197
Operating expenses	5,577		7,143		18,847		22,142
Operating loss	$	(688)	$	(1,969)	$	(4,285)	$	(6,945)


Games	Quarter Ended September 30,				Nine Months Ended September 30,

	2020		2019		2020		2019
Revenue	$	7,611	$	7,164	$	21,713	$	18,922
Cost of revenue	1,955		1,934		5,707		5,259
Gross profit	5,656		5,230		16,006		13,663
Operating expenses	5,152		5,151		15,051		15,476
Operating income (loss)	$	504	$	79	$	955	$	(1,813)


Corporate	Quarter Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Cost of revenue	$	3	$	(68)	$	10	$	(212)
Operating expenses	2,521		3,522		7,852		11,895
Operating loss	$	(2,524)	$	(3,454)	$	(7,862)	$	(11,683)

Our customers consist primarily of consumers and corporations located in the U.S., Europe, and various foreign countries (Rest of the World). Revenue by geographic region (in thousands):


	Quarter Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
United States	$	11,855	$	10,588	$	32,810	$	29,571
Europe	2,206		2,616		6,840		8,069

Rest of the World	2,493		4,487		10,811		10,851
Total net revenue	$	16,554	$	17,691	$	50,461	$	48,491

Long-lived assets (consisting of goodwill, equipment, software, leasehold improvements, operating lease assets, and other intangible assets) by geographic region (in thousands) are as follows:


	September 30, 2020		December 31, 2019
United States	$	18,889	$	20,515
Europe	7,475		7,221

Rest of the World	1,371		1,790
Total long-lived assets	$	27,735	$	29,526